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HDB reported a softer quarter in terms of growth and profitability, coming in below our estimates. The loan book as of 2QFY27 stood at Rs1.24trn, growing 11.7% yoy (+2.2% qoq), as elevated repayments and persistent headwinds in the used CV book continued to cap growth despite an 18.7% yoy pickup in disbursements. GS3 inched up ~9bps qoq to 2.43%, alongside an accretion in Stage-2 assets, pushing credit costs marginally higher to 2.37% (vs 2.32% in 1Q), though the management highlighted the slippages as seasonal and reiterated medium-term credit costs of ~2.3%. NIMs compressed ~12bps qoq to 8.23% as borrowing costs ticked up and due to some seasonality in 1Q, with the management aiming to defend margins at current levels in the near term despite the recent 25bps repo rate hike, and above 8% in the medium term. The management also noted watchfulness over uneven monsoon distribution, drought declarations in some regions, and looming fee-income headwinds from proposed insurance commission regulations (~30bps of ROA). Factoring in the 2Q performance and outlook, we marginally adjust our estimates, resulting in 1-3% cut in FY27-29E EPS. We maintain REDUCE, while lowering our Sep-27E TP by ~7% to Rs625 (Rs675 earlier), implying FY28E PBV of 1.9x

Soft quarter amid weak used vehicle financing

HDBFS posted a soft quarter, with gross loan growing 11.7% yoy (+2.2% qoq) to Rs1.24trn and PAT down 0.6% qoq to Rs7.8bn, despite disbursements growing 18.7% yoy to Rs185.22bn. NIM contracted ~12bps qoq to 8.23%, on elevated COFs and typical sequential seasonality. Cost-to-income stood at ~39.3% (down ~60bps qoq), while credit cost for the quarter was 2.37% (up ~5bps qoq). Asset quality softened sequentially, with GS3 at 2.43%, deteriorating ~9bps qoq (though down ~38bps yoy). The management pointed to seasonal weakness and a slower pickup in used vehicle financing.

Expect 2H to improve, supported by growth in other segments The management remains confident of growth momentum accelerating in 2HFY27 and 4Q, as turnaround measures in used vehicle financing take effect and the unsecured business loan portfolio returns to positive sequential growth (+0.2% qoq), while noting uneven monsoon distribution and insurance regulation as key monitorables. The management also indicated that it targets holding NIMs in a tight range above 8.2% (and >8% over the long term), with borrowing costs tightly managed near current levels via floating-rate LAP repricing and calibrated repricing in some products. The management stated that AI deployments under project ‘Shikhar’, with 1 in 5 early-bucket collection calls now handled by bots, are delivering visible productivity gains. This should keep operating costs disciplined, while credit costs are expected to hover around the steady state ~2.3% mark as CV seasonality normalizes, supporting its targeted ROA of ~2.5%.

Factoring in 2Q performance; maintain REDUCE with revised TP of Rs625 Factoring in 2QFY27 developments and muted commentary, we tweak our FY27-29E, trimming EPS by ~1-3%. We maintain REDUCE with a revised Sep-27E TP of Rs625 (implying FY28E PBV of 1.9x). With peer NBFCs delivering stronger growth, re-rating remains contingent on HDBFS accelerating growth without compromising asset quality.

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